How Low Can Gold Go

Like a roller coaster, the gold market of 2013 encountered steep, stomach dropping dives and climbed inclines filled with anxious anticipation of what lies ahead. Two weeks ago we pondered whether 2013 as a whole was good or bad for gold. We looked at the gold market trend and saw that gold dropped about 25% over the course of the year. We also saw that gold jewelry purchases in the United States rose by 13%. This looks promising. Please keep your hands inside the roller coaster cart and let’s take a look at what’s ahead.

Economic Forecast:

“Promising” may be too strong a word. “Optimistic” may be a better-suited term. Overall, gold is expected to dip lower in 2014, primarily driven by US economic policy. One of the mechanisms meant to improve the US economy also had the side effect of artificially inflating the value of gold: the US government began purchasing large amounts of bonds in 2008, which triggered a gold buying spree, which in turn inflated the price of gold. This was not resource consumption, just speculation.  As the US government has eased back on bond purchasing, speculation on gold has been decreasing, and gold prices have been decreasing as well. In their annual review and forecast, the Australian government has estimated that gold prices will drop an additional 10% over the course of 2014. This estimation is a bit more optimistic than The Wall Street Journal’s forecast we mentioned two weeks ago, where the average gold price was expected to drop about 14.5% for 2014.

In terms of supply and demand in 2014, global gold production is expected to increase 2.7% and overall global demand is expected to increase by about 10%. Gold jewelry fabrication is expected to increase about 6% globally.

Looking beyond 2014, we can expect that gold prices will be driven increasingly by consumption rather than speculation. According to the Australian government, gold prices are expected to stabilize around 2014 averages in 2015 and then begin to rise 4% annually through 2019. Globally, the “newest” gold mines will move into full production and existing mines will taper back on production, resulting in a yearly increase of only 0.8% by 2019. What does all this mean? Overall gold production will be leveling out year over year. Simply stated, with lower supply and greater demand, gold prices should begin to consistently rise.